What Is an Inflation-Protected Annuity (IPA)?

An inflation-protected annuity (IPA) is an annuity that guarantees a real rate of return at or above inflation. The real rate of return on a pre-tax basis is the nominal return, less the inflation rate, thus protecting annuitants and 澳洲幸运5开奖号码历史查询:beneficiary investors from inflation.

Inflation-protected annuities are becoming more popular, with annuity investors worried about the risk of 澳洲幸运5开奖号码历史查询:inflation, decreasing the 澳洲幸运5开奖号码历史查询:purchasing power of their money as they age. These are one 𒅌𝕴of many annuities offered to consumers as a retirement savings vehicle.

How Inflation-Protected Annuities Work

An 澳洲幸运5开奖号码历史查询:annuity contract is a written agreement between an insurance company and a customer outlining each party's obligations in an annuity agreement. An annuity contract document will include the contract's specific details, including the structure of the annuity (variable or fixed), any penalties for early withdrawal, spousal and beneficiary provisions (such as a survivor clause and rate of spousal covera🔯ge), and more. More broadly, an annu♋ity contract may refer to any annuity.

An IPA is similar to a regular 澳洲幸运5开奖号码历史查询:immediate annuity, but its payments are indexed to the rate of inflation. However, oftentimes there is a cap, and investors don't receive payments beyond this percentage rise in the inflation rate. Inflation is simply rising prices and is ๊the enemy of retirees on a fixed inಌcome.

Since most pensions are not indexed to rise with the general inflation rate, and 澳洲幸运5开奖号码历史查询:Social Security increases have tended to be less than general inflation, there's a real r💞isk that older people will outlive their money. That's where IPAs comeꩵ in.

Criticism of Inflation-Protected Annuities

Inflation-protection is not free, however. IPAs provide lower initial payouts to investors compared to other types of annuities. This is because the money invested will increase in value with inflation and compound at least annually with inflation, so initial payments will be significantly lower than later payments—perhaps as much as 25% or even more, less than a regular🌺 immediate annuity. This is because the inflation protection has a cost, and it's essentially paid by having lower initial payments in exchange for the future increase🀅s.

There are other ways to protect against inflation as well. These include Treasury Inflation-Protected Securities (TIPS), which are government bonds💃 indexed to inflation to protect investors from the negative ef🅷fects of inflation.

Dividend-paying stocks are another good hedge because the dividends tend to rise with general inflation. Hard assets such as 澳洲幸运5开奖号码历史查询:commodities and gold also tend to gain more value when ꦺinflation is higher.